In accounting, escrow is an arrangement in which cash or other property is placed with an independent third party, the escrow agent, who releases it only when the conditions of an agreement are met. Common examples are a deposit on a property purchase, part of the price in a business acquisition held back to cover warranty claims, and a mortgage escrow account that collects property tax and insurance payments.
How escrow relates to the main escrow entry
The mechanics of escrow, who the parties are and how banks and payment firms run escrow accounts, are explained in the main entry on escrow in banking and payments. This page covers only the bookkeeping angle. A company that deposits money into escrow still owns it, but it cannot use it freely, so the amount is moved out of ordinary cash and cash equivalents and shown as a separate restricted asset on the balance sheet, current or noncurrent depending on when it is expected to be released. When the condition is met, the escrow balance is cleared against the purchase price or the related liability. The party expecting to receive escrowed funds generally does not record revenue until it is entitled to them. Related entries include escrow funds, escrow analysis for mortgages and the broader idea of a trust account.